Resource curse or destructive creation a tale of crony capitalism in transition

Resource Curse or Destructive Creation: A Tale of Crony Capitalism in Transition Quan Hoang Vuong and Nancy K Napier This paper explores the “resource curse” problem as a counter-example of creative performance and innovation by examining reliance on capital and physical resources, showing the gap between expectations and ex-post actual performance became clearer under conditions of economic turmoil The analysis employs logistic regressions with dichotomous response and predictor variables, showing significant results Several findings that have use for economic and business practice follow First, in a transition period, a typical characteristic of successful firms was their reliance on either capital resources or physical asset endowments, whereas the innovation factor was not significant Second, poor-performing enterprises exhibited evidence of over reliance on both capital and physical assets Third, firms that relied on both types of resources tended to downplay creative performance Fourth, reliance on capital/physical resources and adoption of “creative discipline/innovations” tend to be mutually exclusive In fact, some evidence suggests that firms face more acute problem caused by the law of diminishing returns in troubled times The Vietnamese corporate sector’s addiction to resources may contribute to economic deterioration, through a downward spiral of lower efficiency leading to consumption of more resources The “innovation factor” has not been tapped as a source of economic growth The absence of innovations and creativity has made the notion of “resource curse” become identical to “destructive creation” implemented by ex-ante resource-rich firms, and worsened the problem of resource misallocation in transition turmoil JEL Classifications: D21, L23, M21, O31 Keywords: Organization of Production, Firm Behavior, Business Economics, Creativity/Innovation Processes CEB Working Paper N° 12/037 2012 Université Libre de Bruxelles - Solvay Brussels School of Economics and Management Centre Emile Bernheim ULB CP114/03 50, avenue F.D Roosevelt 1050 Brussels BELGIUM e-mail: ceb@admin.ulb.ac.be Tel : +32 (0)2/650.48.64 Fax: +32 (0)2/650.41.88 Resource Curse or Destructive Creation: A Tale of Crony Capitalism in Transition Quan Hoang Vuong, Ph.D.1 Researcher, CEB/Universite Libre de Bruxelles CP114/03, 42 Avenue F.D Roosevelt, Brussels 1050, Belgium qvuong@ulb.ac.be Nancy K Napier, Ph.D Professor, COBE/Boise State University 1910 University Drive, Boise, ID, USA nnapier@boisestate.edu Department of Business and Management, Aalborg University, Aalborg, DENMARK JEL Classification: D21, L23, M21, O31 Keywords: Organization of Production, Firm Behavior, Business Economics, Creativity/Innovation Processes Acknowledgement: The authors thank Tri Dung Tran (DHVP Research & Consultancy) for discussion and support on preparation of the paper Corresponding author Resource Curse or Destructive Creation in Transition Page Resource Curse or Destructive Creation: A Tale of Crony Capitalism in Transition Abstract: This paper explores the “resource curse” problem as a counter-example of creative performance and innovation by examining reliance on capital and physical resources, showing the gap between expectations and ex-post actual performance became clearer under conditions of economic turmoil The analysis employs logistic regressions with dichotomous response and predictor variables, showing significant results Several findings that have use for economic and business practice follow First, in a transition period, a typical characteristic of successful firms was their reliance on either capital resources or physical asset endowments, whereas the innovation factor was not significant Second, poor-performing enterprises exhibited evidence of over reliance on both capital and physical assets Third, firms that relied on both types of resources tended to downplay creative performance Fourth, reliance on capital/physical resources and adoption of “creative discipline/innovations” tend to be mutually exclusive In fact, some evidence suggests that firms face more acute problem caused by the law of diminishing returns in troubled times The Vietnamese corporate sector’s addiction to resources may contribute to economic deterioration, through a downward spiral of lower efficiency leading to consumption of more resources The “innovation factor” has not been tapped as a source of economic growth The absence of innovations and creativity has made the notion of “resource curse” become identical to “destructive creation” implemented by ex-ante resource-rich firms, and worsened the problem of resource misallocation in transition turmoil Resource Curse or Destructive Creation in Transition Page Resource Curse or Destructive Creation: A Tale of Crony Capitalism in Transition Nancy K Napier and Vuong Quan Hoang In this paper, we explore the effect of organizations’ reliance on capital and physical resources in a transition economy, using data from Vietnamese firms The notion of a “resource curse” (i.e., depending on too many resources after a long period of having too few resources) follows a period of growth and then decline in a country once regarded as the “next tiger” in Southeast Asia To explore this question, we use Vietnam as an example of many transition economies that go through such a boom/bust cycle and the reactions that organizational leaders often follow, which becomes the resource curse The research builds on previous conceptual research between creativity and entrepreneurship (Schumpeter, 1975; Dang, Vuong, and Napier, 2012; Vuong and Napier, 2012), and has four main parts: (1) a brief review of Vietnam’s economy; (2) description of the empirical design; (3) results of the logistic regression; and (4) discussion on implications An economy in transition – ups and downs Like other transition economies, Vietnam has had sweeping reform, known as “Doi Moi,” which began in 1986 The country’s economy grew rapidly from 1996-2000 (at 6.9% annual growth of GDP), accelerating to 7.5% p.a in 2001-2005 During this fast growth, it consumed huge capital and physical assets, including for instance, ODA funding of $15 billion during 2001-2005 alone In addition, Vietnam attracted an increasing stock of foreign direct investments (FDI), which amounted to more than 14,000 projects with nearly $210 billion committed by the end of 2012 The flood of foreign aid results in rent seeking activities where the involvement of politicians in power may lead to misallocation of resources as well as exclusion of other groups from the political process (Djankov, Montalvo, and Reyal-Querol, 2005) Perhaps the windfall of capital inflows does the same as well As to the magnitudes, Djankov et al even statistically prove that “aid is a bigger curse than oil.” Over time, however, Vietnam’s emerging economy has appeared inefficient, wasting physical and capital resources as measured by the “Investment-to-GDP” ratio This ratio has risen over three critical phases: 34.9% (1996-2000) to 39.1% (2001-2005) to 43.5% (2006-2010), meaning the country needed more scarce resources to finance growth In addition, the economy consumed huge credit amounts For example, the credit supply in 2010 was 13.7 times that of 2000, while GDP doubled in the same decade Scarce physical assets (e.g., land, housing, mines) have likewise been used inefficiently by “special interest groups,” including so called "crony capitalists, who have access to scarce resources and yet yield mediocre performance The SOEs, for instance, officially borrowed over $60 billion but created a total market equity value of only $33 billion (Vuong, 2012) Other problems have emerged Reliance on credit to finance growth has generated high inflation, peaking at 23% in 2008 Monetary policy tightened the market rate for credit to as high as 25% (Pham and Riedel, 2012a) Further, from early 2011 to the end of 2012, over Resource Curse or Destructive Creation in Transition Page 100,000 (mostly private) enterprises declared insolvency or quietly closed operations, accounting for between 15-25% of the enterprise population (Vuong, 2012) Although monetary policy is critical, we argue that another solution for the Vietnamese economy may be more crucial, in particular entrepreneurship and creative performance (e.g., Dang, Vuong and Napier, 2012; Vuong, Napier and Tran, 2012) In this paper, then, we expand those ideas empirically In essence, we question whether reliance on capital and physical resources will suffice for yielding economic improvement (Vuong, 2007), without equivalent efforts on creative activity and performance Research methods, data and empirical approach Vuong and Napier (2012) proposed a paradigm for using a disciplined creative process to absorb and use information and insights before making decisions that generate innovations, and may be what the Vietnamese corporate sector and economy appear to miss (Vuong, 2007; Pham & Vuong, 2009) Vietnamese firms, relying more on chance opportunities, have tended to throw scarce capital and physical resources that have little chance of payoff instead of a careful disciplined creative process gearing toward innovations that produce market values, the waste of resources is understandable, highly likely and often very costly for firms and their stakeholders To examine whether, in a period of turmoil, Vietnamese firms appear to rely on physical and capital resources in lieu of using creative processes, we examined debt-to-equity ratio, rate of asset size increase, severity of loss, and qualitative information over the real-world activities of firms with respect to creative performance - for instance, optimal solution on inventory management, and technical innovations An earlier paper (Vuong & Napier, 2012) argued that without “creative quantum” – elements of creative energy for thinker and implementer, made of useful information, data and primitive insights on solutions needed – multiple filters, and a creative discipline in place, an increasing consumption of resources leads to wasted resources, lower efficiency, and diminishing returns So a key question is what happens if reliance on capital and physical resources overwhelms emphasis on innovative outcomes? To examine the question, we used categorical data analysis for count data, which were obtained from both qualitative and quantitative information This analysis was logistic regression estimations for dichotomous response variables, and categorical predictor variables A brief discussion of our statistical methods for research follows ln = logit = + , = ,…, , In this model, is to represent the success probability, that is = ; and is the event we want to observe from the empirical data is the intercept, and coefficients associated with the predictor variable, The standard null hypothesis is = , for each = , … , For examining interactions between variables, the null hypothesis becomes = The likelihood ratio test statistic is employed for hypothesis testing using: Resource Curse or Destructive Creation in Transition Page = − ln = − ln − , No Yes where is the numerical value of the likelihood function computed from the observed data using under the null hypothesis estimate ( ), and under the empirical data-based estimate ( ) This test statistic follows a -distribution with K degrees of freedom (see Agresti 2002 for a full account of technical treatment of logistic regression analysis) The data set came from published reports and official information releases by companies listed on the Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) Out of the approximately 700 companies listed on these stock exchanges, we randomly selected 150 Other data sample came from companies that we have followed for quite some time The data set has 154 data points in total For each data point, the following attributes are considered: (1) how efficiently does the firm operate in economic terms, e.g making profits (end second quarter 2012 performance, compared to performance in the previous two quarters), suffering a loss, or approaching bankruptcy; (2) how much does the firm rely on equity and debt capital for growth, measured by comparing sales to total assets, and leverage ratio; (3) how much does the firm rely on physical assets, measured by reliance on access to land, mine/quarry, and related natural resources (whether these tangible resources are accounted for large portion of the firm’s total assets and generate most of revenues); and (4) to what extent does the firm have innovation or creative solutions at work (whether new product, new service, new management process is reported) Due to the lag effect of investments (financial and physical) to business performance, reliance on resources was measured at the end of 2011 fiscal year All of these predictor variables are categorical, and since we identified only two values ‘Yes=1’ and ‘No=0’, this estimating model is dichotomous both with response and predictor variables The treatment follows Azen & Walker’s (2011) dummy coding; Tables and show the structure for the empirical data In both Table and Table 2, Inn1 means ‘existence of innovation verified’ and Inn0 ‘not verified’ ‘Yes’ and ‘No’ are confirmation of efficient firm performance as observed with our empirical data Cap1 means “Heavy reliance on capital,” Cap0 “Not reliant” likewise As1 and As0 are “reliant on physical asset endowments” and “not reliant,” respectively Table – Count data on well performing firms Cap1 Cap0 As1 Inn1 As0 23 As1 Inn0 As0 16 Table – Count data for poor-performing firms Cap1 Cap0 As1 0 Inn1 As0 0 Inn0 As1 67 Resource Curse or Destructive Creation in Transition Page As0 29 These two subsets of were used to learn more about the problem of reliance on resources versus the value of innovative production / solutions with respect to economic performance of companies The results from logistic regressions follow Empirical results The following statistical estimations were performed with SAS An exploration into the overall = ⋯ = yielding model fit was done by testing the global null hypothesis : = corresponding likelihood ratio test statistic values, which reject the The examination of the “success formula” that prevails in the transition economy of Vietnam is typically based upon the use of capital and physical resources To verify this, the first two separate estimations look like: ln = + and ln = + where , are predictor variables “Capital” and “Asset”, respectively The reference categories for these two models are Cap=Cap0 and Asst=As0, in this order The estimation results are provided below, in Table 3: Table – Results on well performing firms, innovation excluded Parameter df Std -Wald p-Value Estimate logit = + Intercept 2.42 21.52